NLMK.L Regulatory News (NLMK)

NLMK GROUP Q1 2019 IFRS FINANCIAL RESULTS

NLMK Group (LSE: NLMK, MOEX: NLMK), a vertically integrated steelmaker, has published today itsQ1 2019 financial results1.

Q1 2019 key highlights:

· Group revenue in Q1 2019 decreased by 5% qoq to $2.87 bn, amid lower average sales prices.

· Year-on-year, the revenue increased by 3% thanks to a higher sales volume (+11% yoy), which was offset by lower average sales prices.

· EBITDA totalled $695 m (-18% qoq; -14% yoy): this reduction was driven by narrowing price to raw material spreads amid declining steel prices.

· Free cash flow increased by 35% qoq to $678 m driven by working capital release.

· Net debt/EBITDA remained low at 0.26х.

1 Consolidated financial results are prepared under IFRS. Reporting periods of the Company are 3M, 6M, 9M and 12M. Quarterly figures are derived by computational method, including segmental results. Figures for comparable periods can differ from figures published earlier as a result of rounding off to whole numbers.

2 EBITDA is defined as operating profit before equity share in the results of joint ventures, impairment of capital assets and losses from fixed assets retirement, adjusted to depreciation and amortization. EBITDA calculations and further details are presented in the Appendix.

3 Profit for the period attributable to NLMK shareholders.

4 Free cash flow is determined as net cash from operations plus interest received net of interest paid and capital investment. Free cash flow calculations are presented in the Appendix.

5 Net debt is calculated as the sum of long-term and short-term borrowings less cash and cash equivalents, as well as short-term deposits at period end. Net debt / EBITDA is represented by net debt as at the end of the reporting period and EBITDA as last 12 months EBITDA. Net debt calculations are presented in the Appendix.

NLMK GROUP Q1 2019 IFRS CONSOLIDATED FINANCIAL RESULTS

Key highlights

Comment from NLMK Group CFO Shamil Kurmashov:

"In Q1 2019 there was a multidirectional trend in steel consumption in our key markets: in Russia and the US demand grew qoq, while in the EU there was a slowdown in activity among steel product consumers.

"NLMK revenue declined by 5% qoq to $2.9 bn due to steel price adjustment. Year-on-year, revenue increased by 3% yoy, due to, among other things, strong slab sales to captive rolling assets early last year. In Q1 2019, 56% of steel products were sold in the Group's home markets - in Russia, the EU, and the US.

"Sales of the finished steel inventories in the context of steel price correction and the seasonality factor led to an 18% qoq reduction in EBITDA (-14% yoy). The Company managed to increase its free cash flow substantially, reaching $678 m (+35% qoq) on the back of leaner finished steel inventories in the supply chain and a seasonal reduction in scrap inventory. In addition, in Q1 2019 the Company maintained a low capex level, which created a solid foundation for quarterly dividend payout. The Company's debt remained low in the end of Q1 2019: Net debt/EBITDA ratio stood at 0.26х."

TELECONFERENCE

NLMK is pleased to invite the investment community to a conference call with the Company management:

Tuesday, 23 April 2019

· 10:00 a.m. - New York

· 3:00 p.m. - London

· 5:00 p.m. - Moscow

To join the conference call and web-cast, the participants are invited to dial:

U.S. number:

+1 929 477 0448 (local access) // 888 599 8686 (toll free) 

UK number:

+44 330 336 9126 (local access) // 0800 358 63 6377 (toll free) 

Russian number:

+7 495 213 1767 (local access) // 8 800 500 9283 (toll free)

Conference code: 6867092

To join the webcast, please follow the link:

https://webcasts.eqs.com/nlmk20190423.

 *We recommend participants start dialling 5-10 minutes in advance to avoid waiting.

MANAGEMENT COMMENTS

Q1 2019 market review

· Steel exports from China gained 4% qoq (+12% yoy) supported by higher export vs. domestic prices.

· Consumption in the US went up 1% qoq (+5 yoy)* driven by a growing demand from machine-building and construction industries.

· European demand fell by 2% qoq (-4% yoy) against slower consumption rates in the automotive industry.

· In Russia, there was a 1% qoq recovery in demand (+ 5% yoy), in particular for flat products among machine builders and white goods manufacturers and in construction.

Q1 2019 prices

· Raw material prices: average global coal prices fell by 7% qoq (-10% yoy); iron ore prices gained15% qoq (+11% yoy) due to the incident at the open pit mine of one of the largest iron ore producers in early February 2019.

· Market prices** for steel products: 8-12% qoq decline in the US market (-9-10% yoy); 2-7% qoq decline in Europe (-10-16% yoy).

· In Russia, prices for steel products declined by 0.3-1% qoq (-12-16% yoy) in dollar terms.

· Slab export prices (FOB Black Sea) climbed 1% qoq (-17% yoy) backed by expectations of limited supply in the first half of 2019.

* Data on trends for steel consumption in regional markets are estimates.

** Market prices reflect the level of prices for a given calendar period and differ from the average sales prices of the Company and its segments due to the time lag of the production & sales cycle.

Q1 2019 output and sales breakdown:

· Steel output* dropped by 4% qoq (-3% yoy) to 4.18 m t driven by overhauls in NLMK's blast furnace operations as well as seasonally lower steel output at NLMK Russia Long. Steel capacity utilization** remained high at 96% (-2 p.p. qoq).

· Sales remained almost flat qoq. Higher sales of flat steel and slabs accumulated in ports by the end of 2018 offset the seasonal reduction in long product sales and lower pig iron exports due to overhauls.

· Finished steel sales increased by 8% qoq to 2.83 m t (+13% yoy), mainly due to higher sales of hot-rolled steel after the completion of repairs at NLMK's hot-rolling mill.

· Sales of semis to third parties went down by 7% qoq to 1.3 m t (+28% yoy) amid lower pig iron sales.

Slab deliveries to NBH, NLMK's joint venture, fell by 24% qoq (-26% yoy) to 0.44 m t following reduced slab demand from the Group's European companies.

· Sales in home markets (with NBH) increased by 5% qoq (flat yoy) to 2.65 m t: the growth in Russia was 3% qoq (+8% yoy) thanks to higher demand for semis for oil & gas pipes; sales in the US increased by 19% qoq (+9% yoy) driven by higher demand for flat steel; sales of the Group's European companies fell by 3% qoq (-20% yoy) due to the strike at NLMK Clabecq and lower demand amid expectations of lower prices for slabs and finished steel.

* Hereinafter NLMK Group steel output and sales in home markets include NBH. Consolidated sales are given without NBH. Sales to home markets mean sales of the Group's companies in the regions, where production capacities are located in Russia, Europe and the USA.

** Excluding production capacities that are undergoing planned maintenance.

NLMK GROUP KEY FINANCIALS

Q1 2019 revenue

· Revenue totalled $2.87 bn (-5% qoq) amid a 4% qoq reduction in average sales prices as well as 1% lower sales volumes qoq. Year-on-year, revenue was up by 3%: despite an 11% yoy increase in sales, average sales prices were 8% lower yoy.

· The share of finished steel in the revenue increased to 66% (+4 p.p. qoq) with the share of high value added products growing by 1 p.p. qoq amid declining pig iron sales.

· The share of the Russian and the European markets in the Group's consolidated revenue increased by2 p.p. to 33% and 19%, respectively. The share of the US market shrank by 1 p.p. to 20% due to reduced pig iron exports from Russia.

· The Group's revenue from sales in home markets (Russia, the US and the EU), including NBH JV sales, increased by 2 p.p. qoq to 63% supported by an increase in NLMK USA's sales.

Q1 2019 operating profit

· Operating profit* decreased by 22% qoq to $559 m (-15% yoy), driven by lower revenue and higher cash cost against inventory sales (more expensive raw materials) and strengthening of the ruble.

· Commercial expenses declined by 12% qoq to $226 m driven by lower export sales and strengthening of the ruble. The year-on-year increase in commercial expenses was associated with the higher volume of exports.

· A 24% qoq reduction of G&A expenses to $82 m was associated with the accrual of year-end bonuses inQ4 2018. Year-on-year reduction was set against the strengthening of the ruble.

* Operating profit before equity share in results of joint ventures, impairment of capital assets and losses from fixed assets retirement.

Q1 2019 net profit* 

· A 25% qoq net profit reduction to $382 m was mainly due to lower revenues and a higher effective income tax rate. In Q4 2018, the tax rate was lower due to the recognition of tax losses incurred earlier by NLMK USA. A 24% yoy reduction was due to higher cost of sales and exchange rate differences.

Q1 2019 free cash flow

· Free cash flow increased by 35% qoq to $678 m (+13% yoy) supported by working capital release and low capex level.

· Operating cash flow increased by 12% qoq (+15% yoy) to $851 m driven by the release of the working capital.

· Cash inflows from working capital reduction totalled $262 m (vs. $46 m of inflows in Q4 2018) due to:

o +$65 m: a decrease in receivables driven by declining volumes of finished steel sales and lower sales prices;

o +$302 m: inventory reduction, due to the sales of rolled steel accumulated in ports in late 2018. The inventory levels were also impacted by a seasonal reduction in scrap stocks;

o -$107 m: a decrease in payables driven by lower purchases of raw materials from third parties by Russian flat products segment and slabs by NLMK USA.

* Profit for the period, attributable to NLMK shareholders

Investment

· NLMK Group's Q1 2019 investment reduced by 29% qoq to $178 m on the back of the relatively high base of the previous quarter and a period of preparatory activities related to new investment projects.

Dividends

· In Q1 2019, cash outflow for dividend payments totalled $547 m.

· At the Annual General Shareholders' Meeting (AGM) held on 19 April 2019 in Lipetsk, NLMK shareholders approved the payment of Q4 2018 dividends of 5.80 rubles per share, or 100% of NLMK Group's free cash flow over the period.

· On 19 April 2019, the Board of Directors recommended that shareholders approve the payment of Q1 2019 dividends in the amount of 7.34 rubles per share, or 100% of the free cash flow. 

Debt management

· Net debt increased by 3% qoq to $915 m due to the addition of lease liabilities in the amount of $79 m (in line with the new IFRS standard) and the use of the existing loan facility to fund Stoilensky's capex. Due to lower EBITDA, Net debt/EBITDA ratio increased slightly and now stands at 0.26х (vs. 0.25х at the end of the previous quarter).

· Total debt increased by 1% qoq to $2,096 m due to the inclusion of lease liabilities in the debt. An 11% yoy reduction was due to the repayment of the best part of the short-term debt and the lack of massive borrowings over the past 12 months.

Q2 2019 outlook

· Steel output will go down by 6-8% qoq due to the start of BF 6 overhaul and repairs underway in BOF shopNo. 2 at NLMK Lipetsk. As a consequence, a qoq decline in sales is expected with expansion of the finished steel's share in the sales portfolio.

NLMK Russia Flat Products

Q1 2019 highlights:

· Sales of the Segment reduced by 4% qoq driven by lower pig iron sales and demand for slabs among the Group's international companies. Year-on-year, the sales grew by 2% supported by the sales of inventory accumulated in ports in December 2018 and a higher demand for finished steel.

· Revenue of the Segment decreased by 8% qoq to $2 bn due to a 4% qoq decline in average sales prices and lower sales volumes. The 9% yoy decrease in the Segment's revenue was also associated with lower prices for steel products, which was partially offset by a 2% increase in sales volumes.

· EBITDA reduced by 25% qoq (-19% yoy) to $424 m, due to narrowing price to primary raw materials spreads and sales of accumulated inventories with a higher cash cost.

NLMK Russia Long Products

Q1 2019 highlights:

· Sales in Q1 2019 declined by 9% qoq (flat yoy) to 0.77 m t, which is due to seasonally low demand for long products and a decline in billet exports on lower profitability, which was partially offset by sales of inventories accumulated in ports. 

· Revenue in Q1 2019 dropped by 27% qoq to $415 m (-10% yoy), driven by lower volumes and a decline in average sales prices. Year-on-year revenue reduction was also mainly associated with lower prices.

· EBITDA of the Segment in Q1 2019 reduced by 76% qoq to $9 m impacted by ruble appreciation, decline in sales and narrowing price spreads amid high scrap prices. The year-on-year EBITDA reduction (-85%) was also associated with a significant narrowing of price spreads.

Mining and Processing of Raw Materials

Q1 2019 highlights:

· Sales of iron ore in Q1 2019 dropped by 3% qoq to 4.59 m t (+2% yoy). The quarter-on-quarter decline is associated with a reduction in concentrate and sinter ore shipments to NLMK Lipetsk.

· Revenue in Q1 2019 increased by 3% qoq to $268 m (-21% yoy), driven by higher average sales prices. The year-on-year decline was associated with significantly lower prices in Q1 2019.

· EBITDA increased by 6% qoq to $190 m (-25% yoy) following the revenue and supported by operational efficiency programmes. In Q1 2019, EBITDA margins reached 71%.

NLMK USA

Q1 2019 highlights:

· Sales increased by 19% qoq to 0.6 m t (+9% yoy) supported by stronger demand from service centres, pipe, construction, and machine-building industries.

· Revenue increased by 4% qoq to $526 m thanks to growing steel product sales, which was partially offset by declining prices by an average 12%. Year-on-year 22% revenue increase was attributed to sales growth and higher sales prices.

· EBITDA reduced by 65% qoq to $17 m (-58% yoy) amid rapid decline in finished steel prices and consumption of slabs out of stocks with higher costs. EBITDA margins lost 7 p.p. qoq.

NLMK DanSteel*

Q1 2019 highlights:

· Sales of plate increased by 22% qoq (+3% yoy) driven by seasonal growth in demand for plate.

· Revenue increased by 17% qoq to $139 m (+1% yoy) following stronger sales performance, which was partially offset by a decline in plate prices. Slight revenue growth year-on-year was also associated with an increase in the Segment's sales volume.

· EBITDA reached $3 m vs. (-) $8 m in Q4 2018 supported by widening slab/plate spread and stronger sales.

*NLMK DanSteel and plate distribution network.

JV performance (NBH)

Q1 2019 highlights:

· NBH sales declined by 5% to 0.51 m t (-20% yoy) driven by low capacity utilization at NLMK Clabecq due to the strike.

· Revenue decreased by 9% qoq to $0.4 bn following weaker sales performance. A 25% reduction year-on-year was also caused by weaker sales, which was partially offset by rising prices.

· EBITDA totalled (-) $15 m vs. (-) $32 m and (-) $8 m in Q4 2018 and Q1 2018, respectively. EBITDA improvement in Q1 2019 was driven by spreads expansion and efficiency improvement programmes.

Appendix No.1. Operating and financial results

 (1) Sales markets

(2) NLMK Russia Flat Products

(3) NLMK Russia Long Products

(4) Mining Segment

(5) NLMK USA

(6) NLMK Dansteel

(7) Sales by product

 (8) Sales by region

 (9) Revenue by region

(10) EBITDA*

* EBITDA, used in NLMK's financial releases, is calculated as operating profit before equity share in the results of joint ventures, impairment of capital assets and losses from fixed assets retirement, adjusted to depreciation and amortization. Under IFRS, EBITDA is not an indicator of operating profit, operating activity or liquidity, and NLMK discloses it because investors and analysts could use equivalent indicators. That said, NLMK's EBITDA should not be viewed on a standalone basis, or in place of profit before tax, or cash flows from operations, as defined by IFRS, or as an indicator of operational efficiency, or as the sum of free cash funds that NLMK can invest into business development. NLMK's EBITDA margin and EBITDA might not be comparable to similar indicators disclosed by other companies as there are no commonly accepted rules for calculating them. For instance, NLMK's EBITDA is calculated similar to what is termed as 'Adjusted EBITDA' in other companies, as NLMK's EBITDA excludes other profit/loss items in addition to interest payments, income tax, depreciation and amortization.

** Operating profit before equity share in results of joint ventures, impairment of capital assets and losses from fixed assets retirement.

(11) Free cash flow

(12) Net debt

(13) Production of core products

 (14) Slab sales, including intra-group sales to NLMK Group companies

(15) Export shipments of steel products from Russian assets of the Group to third party consumers

(16) Segmental information

Balance figures presented as of 31.03.2019

Balance figures presented as of 31.12.2018